FINRA Manual: Contents
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5000. SECURITIES OFFERING AND TRADING STANDARDS AND PRACTICES
5100. SECURITIES OFFERINGS, UNDERWRITING AND COMPENSATION
5120. Offerings of Members’ Securities
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5121. Public Offerings of Securities With Conflicts of Interest
(a) Requirements for Participation in Certain Public Offerings
No member that has a conflict of interest may participate in a public offering unless the offering complies with subparagraphs (1) or (2).
(1) There must be prominent disclosure of the nature of the conflict of interest in the prospectus, offering circular or similar document for the public offering, and one of the following conditions must be met:
(A) the member(s) primarily responsible for managing the public offering does not have a conflict of interest, is not an affiliate of any member that does have a conflict of interest, and meets the requirement of paragraph (f)(12)(E);
(B) the securities offered have a bona fide public market; or
(C) the securities offered are investment grade rated or are securities in the same series that have equal rights and obligations as investment grade rated securities.
(2) (A) A qualified independent underwriter has participated in the preparation of the registration statement and the prospectus, offering circular, or similar document and has exercised the usual standards of "due diligence" in respect thereto; and
(B) there must be prominent disclosure in the prospectus, offering circular or similar document for the offering of:
(i) the nature of the conflict of interest;
(ii) the name of the member acting as qualified independent underwriter; and
(iii) a brief statement regarding the role and responsibilities of the qualified independent underwriter.
(b) Escrow of Proceeds; Net Capital Computation
(1) All proceeds from a public offering by a member of its securities shall be placed in a duly established escrow account and shall not be released therefrom or used by the member in any manner until the member has complied with subparagraph (2) hereof.
(2) Any member offering its securities pursuant to this Rule shall immediately notify FINRA when the public offering has been terminated and settlement effected and shall file with FINRA a computation of its net capital computed pursuant to the provisions of SEA Rule 15c3-1 (the net capital rule) as of the settlement date. If at such time its net capital ratio as so computed is more than 10:1 or, net capital fails to equal 120 percent of the minimum dollar amount required by Rule 15c3-1 or, in the event the member calculates its net capital requirement using the alternative standard (set forth in Rule 15c3-1(a)(1)(ii)), its net capital is less than seven percent of aggregate debit items as computed in accordance with Rule 15c3-3a, all monies received from sales of securities of the public offering must be returned in full to the purchasers thereof and the offering withdrawn, unless the member has obtained from the SEC a specific exemption from the net capital rule. Proceeds from the sales of securities in the public offering may be taken into consideration in computing net capital ratio for purposes of this paragraph.
(3) Any member offering its securities pursuant to this Rule shall disclose in the registration statement, offering circular or similar document a date by which the offering is reasonably expected to be completed and the terms upon which the proceeds will be released from the escrow account described in paragraph (b)(1).
(c) Discretionary Accounts
Notwithstanding NASD Rule 2510, no member that has a conflict of interest may sell to a discretionary account any security with respect to which the conflict exists, unless the member has received specific written approval of the transaction from the account holder and retains documentation of the approval in its records.
(d) Application of Rule 5110
Any public offering subject to paragraph (a)(2) is subject to Rule 5110, whether or not the offering would be otherwise exempted from the filing or other requirements of that rule.
(e) Requests for Exemption from Rule 5121
Pursuant to the Rule 9600 Series, FINRA may in exceptional and unusual circumstances, taking into consideration all relevant factors, exempt a member unconditionally or on specified terms from any or all of the provisions of this Rule that it deems appropriate.
The definitions in Rule 5110 are incorporated herein by reference. For purposes of this Rule, the following words shall have the stated meanings:
The term "affiliate" means an entity that controls, is controlled by or is under common control with a member.
(2) Beneficial Ownership
The term "beneficial ownership" means the right to the economic benefits of a security.
(3) Bona Fide Public Market
The term "bona fide public market" means a market for a security of an issuer that has been reporting under the Exchange Act for at least 90 days and is current in its reporting requirements, and whose securities are traded on a national securities exchange with an Average Daily Trading Volume (as provided by SEC Regulation M) of at least $1 million, provided that the issuer's common equity securities have a public float value of at least $150 million.
(4) Common Equity
The term "common equity" means the total number of shares of common stock outstanding without regard to class, whether voting or non-voting, convertible or non-convertible, exchangeable or non-exchangeable, redeemable or non-redeemable, as reflected on the consolidated financial statements of the company.
(5) Conflict of Interest
The term "conflict of interest" means, if at the time of a member's participation in an entity's public offering, any of the following applies:
(A) the securities are to be issued by the member;
(B) the issuer controls, is controlled by or is under common control with the member or the member's associated persons;
(C) at least five percent of the net offering proceeds, not including underwriting compensation, are intended to be:
(i) used to reduce or retire the balance of a loan or credit facility extended by the member, its affiliates and its associated persons, in the aggregate; or
(ii) otherwise directed to the member, its affiliates and associated persons, in the aggregate; or
(D) as a result of the public offering and any transactions contemplated at the time of the public offering:
(i) the member will be an affiliate of the issuer;
(ii) the member will become publicly owned; or
(iii) the issuer will become a member or form a broker-dealer subsidiary.
(A) The term "control" means:
(i) beneficial ownership of 10 percent or more of the outstanding common equity of an entity, including any right to receive such securities within 60 days of the member's participation in the public offering;
(ii) the right to 10 percent or more of the distributable profits or losses of an entity that is a partnership, including any right to receive an interest in such distributable profits or losses within 60 days of the member's participation in the public offering;
(iii) beneficial ownership of 10 percent or more of the outstanding preferred equity of an entity, including any right to receive such preferred equity within 60 days of the member's participation in the public offering; or
(iv) the power to direct or cause the direction of the management or policies of an entity.
(B) The term "common control" means the same natural person or entity controls two or more entities.
For purposes of the definitions of affiliate, conflict of interest and control under this Rule, the term "entity":
(A) includes a company, corporation, partnership, trust, sole proprietorship, association or organized group of persons; and
(B) excludes the following:
(i) an investment company registered under the Investment Company Act;
(ii) a "separate account" as defined in Section 2(a)(37) of the Investment Company Act;
(iii) a "real estate investment trust" as defined in Section 856 of the Internal Revenue Code; or
(iv) a "direct participation program" as defined in Rule 2310.
(8) Investment Grade Rated
The term "investment grade rated" refers to securities that are rated by a nationally recognized statistical rating organization in one of its four highest generic rating categories.
(9) Preferred Equity
The term "preferred equity" means the aggregate capital invested by all persons in the preferred securities outstanding without regard to class, whether voting or non-voting, convertible or non-convertible, exchangeable or non-exchangeable, redeemable or non-redeemable, as reflected on the consolidated financial statements of the company.
(10) Prominent Disclosure
A member may make "prominent disclosure" for purposes of paragraphs (a)(1) and (a)(2)(B) by:
(A) providing the notation "(Conflicts of Interest)" following the listing of the Plan of Distribution in the Table of Contents section required in Item 502 of SEC Regulation S-K, and by providing such disclosures in the Plan of Distribution section required in Item 508 of SEC Regulation S-K and any Prospectus Summary section required in Item 503 of SEC Regulation S-K; or
(B) for an offering document not subject to SEC Regulation S-K, by providing disclosure on the front page of the offering document that a conflict exists, with a cross-reference to the discussion within the offering document and in the summary of the offering document if one is included.
(11) Public Offering
The term "public offering" means any primary or secondary offering of securities made pursuant to a registration statement or offering circular including exchange offers, rights offerings, offerings made pursuant to a merger or acquisition and all other securities offerings of any kind whatsoever, except any offering made pursuant to:
(A) an exemption from registration under Sections 4(1), 4(2), or 4(6) of the Securities Act;
(B) Securities Act Rule 504, if the securities are "restricted securities" under Securities Act Rule 144(a)(3), Securities Act Rules 505 or 506; or
(C) Securities Act Rule 144A or SEC Regulation S.
The term public offering shall exclude exempted securities as defined in Section 3(a)(12) of the Exchange Act.
(12) Qualified Independent Underwriter
The term "qualified independent underwriter" means a member:
(A) that does not have a conflict of interest and is not an affiliate of any member that has a conflict of interest;
(B) that does not beneficially own as of the date of the member's participation in the public offering, more than 5% of the class of securities that would give rise to a conflict of interest, including any right to receive any such securities exercisable within 60 days;
(C) that has agreed in acting as a qualified independent underwriter to undertake the legal responsibilities and liabilities of an underwriter under the Securities Act, specifically including those inherent in Section 11 thereof; and
(D) that has served as underwriter in at least three public offerings of a similar size and type during the three-year period immediately preceding the filing of the registration statement or the date of first sale in an offering without a registration statement. This requirement will be deemed satisfied if, during the past three years, the member:
(i) with respect to a proposed public offering of debt securities, has acted as sole underwriter or book-running lead or co-manager of at least three public offerings of debt securities each with gross proceeds of not less than 25% of the anticipated gross proceeds of the proposed offering; and
(ii) with respect to a proposed public offering of equity securities, has acted as sole underwriter or book-running lead or co-manager of at least three public offerings of equity securities (or of securities convertible into equity securities), each with gross proceeds of not less than 50% of the anticipated gross proceeds of the proposed offering.
(E) none of whose associated persons in a supervisory capacity who are responsible for organizing, structuring or performing due diligence with respect to corporate public offerings of securities:
(i) has been convicted within ten years prior to the filing of the registration statement or the preparation of an offering circular in an offering without a registration statement of a violation of the anti-fraud provisions of the federal or state securities laws, or any rules or regulations promulgated thereunder, in connection with a registered or unregistered offering of securities;
(ii) is subject to any order, judgment, or decree of any court of competent jurisdiction entered within ten years prior to the filing of the registration statement, or the preparation of an offering circular in an offering without a registration statement, permanently enjoining or restraining such person from engaging in or continuing any conduct or practice in violation of the anti-fraud provisions of the federal or state securities laws, or any rules or regulations promulgated thereunder in connection with a registered or unregistered offering of securities; or
(iii) has been suspended or barred from association with any member by an order or decision of the SEC, any state, FINRA or any other self-regulatory organization within ten years prior to the filing of the registration statement, or the preparation of an offering circular in an offering without a registration statement, for any conduct or practice in violation of the anti-fraud provisions of the federal or state securities laws, or any rules, or regulations promulgated thereunder, or the anti-fraud rules of any self-regulatory organization in connection with a registered or unregistered offering of securities.
(13) Registration Statement
The term "registration statement" means a registration statement as defined by Section 2(a)(8) of the Securities Act; notification on Form 1A filed with the SEC pursuant to the provisions of Securities Act Rule 252; or any other document, by whatever name known, initiating a registration or similar process for an issue of securities which is required to be filed by the laws or regulations of any federal or state agency.
(14) Subordinated Debt
The term "subordinated debt" includes (A) debt of an issuer which is expressly subordinate in right of payment to, or with a claim on assets subordinate to, any existing or future debt of such issuer; or (B) all debt that is specified as subordinated at the time of issuance. Subordinated debt shall not include short-term debt with maturity at issuance of less than one year and secured debt and bank debt not specified as subordinated debt at the time of issuance.
Amended by SR-FINRA-2014-003 eff. May 28, 2014.
Amended by SR-FINRA-2010-026 eff. Dec. 15, 2010.
Amended by SR-FINRA-2007-009 eff. Sep. 14, 2009.
Amended by SR-NASD-2005-087 eff. Aug. 1, 2006.
Amended by SR-NASD-2000-04 eff. March 22, 2004.
Amended by SR-NASD-2002-97 eff. July 29, 2002.
Amended by SR-NASD-99-02 eff. Dec. 7, 1999.
Amended by SR-NASD-97-95 eff. Aug. 17, 1998.
Amended by SR-NASD-97-38 eff. Dec. 15, 1997.
Amended by SR-NASD-97-45 eff. Sept. 10, 1997.
Amended by SR-NASD-97-28 eff. Aug. 7, 1997.
Amended by SR-NASD-96-17 eff. Aug 15, 1996.
Amended by SR-NASD-92-46 eff. May 10, 1994.
Amended by SR-NASD-94-12 eff. Mar. 7, 1994.
Amended eff. Feb. 8, 1971; Dec. 29, 1971; Sept. 1, 1972; Mar. 21, 1972; Apr. 1, 1974; May 19, 1977; June 2, 1983; Feb. 22, 1984; Mar. 29, 1988; Oct. 24, 1988; Oct. 16, 1992; Jan. 28, 1993.
Selected Notices: 75-14, 77-13, 80-3, 80-39, 83-45, 86-28, 88-33, 88-89, 88-98, 88-100, 90-39, 92-57, 92-58, 94-45, 95-44, 96-53, 04-13, 09-49, 10-49.